Taxes, kid issues and more: Rich families’ biggest blunders

A famous line in an F. Scott Fitzgerald short story declares that the very rich are different from you and me.

The obvious difference: While the 99.9 percent strive to make a living, the 0.1 percent are working out what to do with the wealth they already have. Preserving and investing and donating and spending wealth is more than a full-time job and requires multiple types of expertise. Pitfalls abound, especially within families.

Speak to a few family office experts, and you’ll hear the phrase “When you’ve seen one family office, you’ve seen one family office.” In other words, there’s no uniform method for handling great wealth. But press them on common errors, and they have a lot to say about patterns that trip up even those with the best intentions.

A group of professionals from family offices, investment managers, estate planners, art advisers, and other disciplines were asked to describe mistakes they’ve seen. Fitzgerald wrote that there are “no types, no plurals.” But it turns out there are some lessons we can all learn.

Avy SteinCo-founder, Cresset Capital Management

The biggest mistake a wealthy family can make is not having a family governance structure in place [that provides] education, a clear mission, and clear communication. If you don’t get that right, nothing you can do—taxes, wealth planning, you name it—is going to save you. The percentage of families that go from shirtsleeves to shirtsleeves in three generations, driven by failures in communication and lack of a mission, is incredible.

Stewart KesmodelHead of global family office for the Americas, UBS Group AG

We see families that, in an effort to maintain cost control or to decrease costs, try to put an entity together with a bare-bones crew. In that effort to contain costs, they end up putting in a lot of inefficiency. In some cases they are not setting themselves up to be successful, to achieve the goals they set out as a family.

We had one client last year who ultimately ended up severing all their relationships on the Street and basically replacing their entire investment team from scratch. We have others that are a little more thoughtful—that have had multiple generations, that are constantly monitoring or seeking out guidance on best practices, and that are making more minor adjustments. Then, unfortunately, we have some clients that are very set in their ways. They appreciate getting guidance and thoughts but continue to operate with the status quo, without making any changes even though it’s detrimental to their goals and objectives.

Elizabeth GlasgowPartner, Venable LLP

I’ve seen a couple of family office clients recently get blindsided by a cybersecurity risk. More than one had a pretty significant exposure, even a potential ransom scenario, with a virus [accidentally] downloaded. It’s something that needs to be incorporated more into the family office setup structure. The entire purpose, generally, of using a single family office is the privacy, the anonymity, the protection. So a successful cyberattack undermines the family office structure at a baseline level.

The biggest mistake that ultrahigh-net-worth individuals and families make is defining success based solely on how much their portfolio returns.

Instead, wealthy families should quantify success based on what they’re trying to accomplish and do with their wealth.

Success should be measured against how you achieve your goals and live your values, rather than just having a portfolio benchmarked to an artificial number.

Keith BloomfieldCEO, Forbes Family Trust

The most attractive investment opportunities are often complex, and realizing value requires patience, liquidity management and specialized advisers. The world’s most prominent families may have all of those in spades, but without a sophisticated family office to orchestrate all of those, they are likely to see subpar results. The pitfall for some families, therefore, is not devoting attention to building the family office, which enables it to arrange the other components to work together optimally.

Kris Putnam-WalkerlyPresident, Putnam Consulting Group

A common problem among wealthy families seeking to be charitable is that they come up with the solution without doing their homework to understand the true needs and the best ways to meet those needs.

Wealthy families and individuals are likely not in frequent contact with the people they are trying to help and often make assumptions about what they need. As a donor, if you don’t take time to understand what the underlying problems are, you aren’t going to come up with solutions to solve them.

They start their own nonprofit to meet the need, instead of identifying the existing resources in the community and ways that their funding could strengthen and expand those resources.

There’s almost a predisposition to falling in love with mission-driven impact investments like addressing climate change, or food deserts, or the unbanked. You so want the entrepreneur to succeed that you’re unintentionally willing to ignore negative variables in due diligence, for example. It’s easier to be dispassionate with investments that aren’t philosophically aligned with what you see as your mission in the world.

Von SanbornPartner, Day Pitney LLP

Generally, those buying art fall into one of two camps: collectors or investors. When collections become a significant portion of their net worth, collectors may be unwilling to sell because they are emotionally attached to the pieces they have purchased and lived with for years. In the same situation, investors may consider divesting at least a portion of their collection. So we see investors making more informed decisions.

Leo HinderyManaging partner, Intermedia Partners

I really try to stay in my lane, in our fund and my personal investing. As for those businesses where my colleagues and I have no particular expertise, we almost never get involved. I have a friend who oversees investments for a very large multigenerational family office in California, and he tells me about the family members constantly jumping in with ideas in areas where they don’t have expertise. I don’t know how he ever optimizes outcomes.

D. Stephen AntionPartner, Winston & Strawn LLP

I have seen some investors so obsessed with avoiding taxes that they made major mistakes. One family had sold their business in a tax-free merger and had a very large, single-stock position in a major public company with zero tax basis. The plan was to hold until the owner died and get the income tax basis step-up. So they did not sell to diversify, but instead borrowed against the stock to fund purchases that were both personal—homes, plane, art—and investment. Leverage was not particularly high. However, in the financial crisis, the stock really melted down, much more than the market, which caused margin calls. They lost virtually everything because of this.

I have seen others that engaged in questionable tax shelter transactions. There is a big difference between intelligent tax planning and abusive tax shelters, but some people are so obsessed with avoiding tax that they cross the line. Ultimately, it is very costly.

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